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Canadian government stops guarantees on 40 year and 100% mortgages

The Canadian government announced last week that they will stop guaranteeing 40 year and 100% mortgages through the Canadian House and Mortgage Corporation (CHMC) effective October 15th, 2008.

The announcement stated:

The Government of Canada today announced adjustments to the rules for government guaranteed mortgages aimed at protecting and strengthening the Canadian housing market. The new measures include:

Fixing the maximum amortization period for new government-backed mortgages to 35 years;

Requiring a minimum down payment of five per cent for new government-backed mortgages;

Establishing a consistent minimum credit score requirement; and

Introducing new loan documentation standards

oday’s announcement marks a responsible and measured approach by the Government to ensure Canada’s housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada.”

The new rules only affect new government backed mortgages these measures relate only to new, government-backed insured mortgage, and don’t affect Canadians with current mortgages. The October deadline allows existing mortgage pre-approvals with the common 90-day duration to be used or expire.

Interestingly, the Financial Post reported some banks, including the Bank of Montreal and CIBC have quickly responded by removing the 40 year amortization mortgage from the market, while CIBC also now requires a minimum 5% downpayment.

Other banks to follow have included online bank ING Direct Canada, while Toronto-Dominion Bank said it is reviewing its mortgage offering, and Royal Bank of Canada and Bank of Nova Scotia, are expected to follow as well.

As a result of these changes, many people are expecting that there will be a huge rise in house sales as home buyers who don’t have a 5% deposit or need the longer amortization period in order to afford a house in high price areas such as Toronto, Calgary and Vancouver will be rushing to make their purchase before the October deadline. This would indicate a busy period for the next 3 months and then we’re most likely to see a drop off in the market as lenders, brokers and buyers adjust.